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Dynamic targeted pricing with strategic consumers

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  • Chen, Yuxin
  • Zhang, Z. John
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    Abstract

    We investigate in this paper whether dynamic targeted pricing based on consumer purchase history could benefit a practicing firm even when consumers are "strategic" in that they actively seek to avail themselves of a low price in the future. Such strategic behavior on the part of consumers has been shown in the literature to render such dynamic targeted pricing unprofitable, even for a monopoly firm. We show that dynamic targeted pricing can benefit competing firms, when they actively pursue customer recognition based on consumer purchase history. This is because in order to pursue customer recognition, competing firms need to price high to "screen out" price-sensitive consumers and hence price competition is moderated. As a result, all competing firms can become better off with targeted pricing than without even when consumers behave strategically. Interestingly, because of this competition moderation effect, the paradoxical outcome occurs where dynamic targeted pricing may not benefit a monopolist, but it may benefit competing firms. We also show that dynamic targeted pricing can expand the market such that social welfare unambiguously improves.

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    Bibliographic Info

    Article provided by Elsevier in its journal International Journal of Industrial Organization.

    Volume (Year): 27 (2009)
    Issue (Month): 1 (January)
    Pages: 43-50

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    Handle: RePEc:eee:indorg:v:27:y:2009:i:1:p:43-50

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    Web page: http://www.elsevier.com/locate/inca/505551

    Related research

    Keywords: Dynamic pricing Price discrimination Targeted promotions;

    References

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    Citations

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    Cited by:
    1. Oz Shy & Rune Stenbacka, 2011. "Customer recognition and competition," Working Papers, Federal Reserve Bank of Boston 11-7, Federal Reserve Bank of Boston.
    2. Rosa-Branca Esteves, 2014. "Behaviour-Based Price Discrimination with Retention Offers," NIPE Working Papers, NIPE - Universidade do Minho 09/2014, NIPE - Universidade do Minho.
    3. Zuzana Brokesova & Cary Deck & Jana Peliova, 2014. "Experimenting with Behavior Based Pricing," Working Papers 14-12, Chapman University, Economic Science Institute.
    4. repec:hal:wpaper:halshs-00622291 is not listed on IDEAS
    5. Rosa Branca Esteves, 2010. "Price Discrimination with Private and Imperfect Information," NIPE Working Papers, NIPE - Universidade do Minho 3/2010, NIPE - Universidade do Minho.
    6. Thomas Gehrig & Oz Shy & Rune Stenbacka, 2012. "A Welfare Evaluation of History-Based Price Discrimination," Journal of Industry, Competition and Trade, Springer, vol. 12(4), pages 373-393, December.
    7. Oz Shy & Rune Stenbacka, 2012. "Investment in customer recognition and information exchange," Working Papers, Federal Reserve Bank of Boston 12-4, Federal Reserve Bank of Boston.
    8. Rosa-Branca Esteves & Sofia Cerqueira, 2014. "Behaviour-Based Price Discrimination under Advertising and Imperfectly Informed Consumers," NIPE Working Papers, NIPE - Universidade do Minho 08/2014, NIPE - Universidade do Minho.
    9. De Nijs, Romain, 2013. "Information provision and behaviour-based price discrimination," Information Economics and Policy, Elsevier, vol. 25(1), pages 32-40.
    10. Rosa Branca Esteves, 2007. "Pricing with Customer Recognition," NIPE Working Papers, NIPE - Universidade do Minho 27/2007, NIPE - Universidade do Minho.
    11. Rosa Branca Esteves, 2013. "Customer Poaching with Retention Strategies," NIPE Working Papers, NIPE - Universidade do Minho 02/2013, NIPE - Universidade do Minho.
    12. Bernard Caillaud & Romain De Nijs, 2011. "Strategic loyalty reward in dynamic price Discrimination," PSE Working Papers halshs-00622291, HAL.

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